§Levered Firms as Comparables
§The Unlevered Cost of Capital
§Asset of Unlevered Cost of Capital is the expected return
required by the firm’s investors to hold the firm’s underlying
assets, which is the weighted average of the firm’s equity and
debt costs of capital
§The Unlevered Cost of Capital
§Asset or Unlevered Cost of Capital
§Asset or Unlevered Beta
UED
ED
r= r+ r
E+D E+D
UED
ED
β= β+ β
E+D E+D
§The Unlevered Cost of Capital
§Some firms maintain large cash balances, which is a risk-free
asset
§In such cases, Net Debt is calculated as Debt minus Cash
§Net Debt = Debt – Excess Cash and Short-Term Investments
§Industry Asset Betas
§It is also possible to combine estimates of asset betas for
multiple firms in the same industry or line of business
§Doing so will reduce estimation error and improve accuracy
of the estimated beta
